INTELLECTUAL PROPERTY RIGHTS IN THE WTO ACCESSION PACKAGE: ASSESSING CHINA’S REFORMS

Keith E. Maskus

Professor

University of Colorado, Boulder

December 16, 2002

ABSTRACT: In this paper I consider implications of China’s recent and ongoing reforms in intellectual property rights (IPRs) as it attains membership in the World Trade Organization (WTO). I discuss the consistency of China’s IPRs laws with WTO requirements and indicate outstanding issues. I then present basic economic theory of the need for IPRs, distinguishing among patents, trademarks, trade secrets, and copyrights. IPRs can be an important stimulus to innovation and economic growth if structured correctly and introduced in an environment of active competition. Otherwise they may diminish growth by limiting imitation and diffusion, leading to difficult policy choices. I compare China’s post-WTO IPRs regime with standards that seem appropriate for a middle- income developing economy. Overall, the new legal regime seems sensible for China’s position but there are some discrepancies that raise questions about policy. The current IPRs situation in China is analyzed, based on interviews of enterprise managers, public officials, and scholars. China has implemented a strong set of laws but there remain severe problems with enforcement. A final section shows that applications for IPRs are rising sharply but the use of IPRs differs greatly across regions, largely because of significant income disparities.

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1. Introduction

After a long period of rapid growth and significant structural change, the Chinese

economy increasingly makes use of advanced production technologies, while demand

shifts toward higher-quality goods and services. Chinese enterprises place growing

emphasis on developing brand-name recognition, reputation for quality, and product

innovation. In such an environment, the provision and enforcement of intellectual

property rights (IPRs) help promote further economic development. With substantial

structural reform ongoing in Chinese enterprises, it is important to establish incentives for

the development and expansion of businesses in high-growth sectors and to support

innovation in consumer products. Properly structured, IPRs can help achieve these goals.

The Chinese central government recognizes the need for a workable IPRs system.

Support is also growing among innovative Chinese enterprises, which likely suffer the

largest losses from trademark and copyright infringement in the economy. Chinese

enterprises also understand that their access to new foreign technologies depends partially

on IPRs.

In response both to changes in internal preferences and to considerable external

pressure, China has undertaken a dramatic reform of its intellectual property laws. Since

1990 the government has updated its laws covering copyrights, trademarks, patents, and

trade secrets (or “anti-unfair competition”) and has adopted protection for new plant

varieties and integrated circuits. The country has joined nearly all major international

IPRs conventions and is a member of international agreements on classification of patents

and trademarks and the deposit of microorganisms.

Most recently China made further revisions in order to conform to the

requirements of the Agreement on Trade-Related Intellectual Property Rights (TRIPS) in

the World Trade Organization (WTO). In its accession agreement with WTO members,

China agreed to implement intellectual property laws that are fully consistent with

TRIPS. When legislative reforms are fully implemented China will have a modern

structure for IPRs on a par with many developed economies.

China also has established education and training programs in IPRs, upgraded its

administrative and legal systems for enforcing these rights, and undertaken numerous

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anti-counterfeiting programs. Nevertheless, problems remain in the administration and

enforcement area. Victims of infringement complain about weak monetary and civil

penalties, delays in administrative and court procedures, and “local protectionism” that

makes enforcement difficult in regional jurisdictions.

The evolving system presents both opportunities and challenges for the Chinese

economy. The opportunities arise from the improved environment for technical

innovation, product development, and inward technology and investment flows. The

challenges include moving resources out of infringing activities into legitimate

businesses, coping with higher costs of imitating products and technologies, and

absorbing the costs of administering a stronger system.

Over time, stronger IPRs will shift incentives away from encouraging static

competition through copying and imitation toward promoting dynamic competition

through innovation, technology absorption, and product design. The latter incent ives are

increasingly appropriate for China with its plans to become a leader in technology

development. However, it will place competitive pressures on lagging enterprises and

will raise concerns about the distribution of costs and benefits among individuals,

enterprises, and regions.

The ultimate objectives of an IPRs system are to increase competition through

innovation and technology acquisition and to encourage innovators to make their

products available to consumers. Strengthening IPRs improves such incentives but is not

sufficient on its own. Rather, the system needs to be developed within a broader set of

policies, including further enterprise reform, development of financial and innovation

systems, expansion of educational opportunities, and means for sustaining competition on

Chinese markets.

The paper proceeds as follows. In Section Two I describe progress in China’s

WTO commitments in the IPRs area. In Section Three I briefly overview the economic

rationale for intellectual property rights. In Section Four I discuss the intricate

relationships between IPRs and economic development, reviewing available evidence on

that subject, and assess China’s regime regarding its potential for encouraging growth. I

analyze recent trends in the use of IPRs in China in Section Five, considering both data

and information learned from a series of interviews in 1998 and 2001. I also develop

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some simple indications of how Chinese economic development could be affected by

stronger IPRs. In Section Six I provide conclusions and recommendations.

2. WTO Commitments

Since the mid-1980s China has implemented a number of laws and administrative

regulations covering intellectual property protection. 1 Many of these changes were made

as a result of three agreements, each a Memorandum of Understanding, with the United

States. Thus, external pressure has been an important impetus for legal change.

This process has culminated with the introduction of numerous changes in

China’s IPRs regime in anticipation of joining the WTO. For example, a substantial

second revision of the Patent Law was achieved in 2000, coming into effect in July 2001.

This revision establishes full TRIPS compliance in patent regulations and clarifies and

strengthens certain administrative and judicial procedures, including the use of

preliminary injunctions. Similarly, in 1997 the government promulgated new rules on the

protection of new plant varieties, establishing sui generis, TRIPS-consistent protection

along the lines of 1978 UPOV. A new set of regulations for the protection of layout

designs of integrated circuits came into force October 1, 2001.

Just prior to China’s accession to the WTO at the Doha Ministerial in November

2001, there remained some differences with required TRIPS standards.2 Table 1 provides

a list of areas in which standards are mandated, the norms (minimum standards) in

TRIPS, the status of China’s laws and regulations just before Doha, and China’s actions

in cases where a divergence exists. Most of these discrepancies arose in the trademark

and copyright areas. For this reason, on October 27, 2001 the People’s Congress enacted

a substantial revision to its trademark and copyright laws to make both consistent with

TRIPS obligations.3

The trademark law establishes the right of individual Chinese persons to apply to

register trademarks. It also clarifies the definition of collective marks and joint

ownership and protects collective marks and certificate marks for the first time. It further

1 See Lacroix and Konan (2002), Maskus, et al, (1998), and Potter (2001). 2 See “Draft Protocol on the Accession of China,” 10 July 2001. 3 The description in this paragraph relies on information from an interview with a senior judicial official in Beijing and on Lehman, Lee and Xu, China Intellectual Property Newsletter: Special Issue, 2001.

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broadens the range of symbols that may be used as a distinctive mark, extends protection

of well-known trademarks to their unauthorized use on different products, and sets out

criteria for ascertaining well-known marks. Finally, it establishes protection for

geographical indications in accordance with TRIPS. The copyright law establishes a

communication right over the internet, sets out fair use limitations for electronic content

consistent with two new treaties reached under the aegis of the World Intellectual

Property Organization (WIPO), clarifies broadcast and rental rights, and recognizes that

databases are copyrightable. Both the trademark and copyright laws clarify the amounts

of compensation available to plaintiffs and methods for their calculation. In copyrights,

foreign firms are now permitted to plead their cases with local copyright bureaus in

addition to the National Copyright Administration.

This recent and ongoing activity should make China’s IPRs legal regime fully

consistent with TRIPS in the near term. In Section 4 we consider how appropriate these

new standards may be for promoting economic development.

3. The Nature of Intellectual Property Rights

To analyze how IPRs influence economic development, it is important to

understand their economic underpinnings. The need for IPRs arises from the social

objective of promoting the creation of new types of information adding to the economy’s

knowledge base. These types of information include new products and technologies, new

literary, musical, and artistic expressions, and indicators of product quality. An

intellectual property right defines the extent to which its owners may legally prevent

others from taking actions that infringe or damage the property. It may also be defined as

the legal ability to set terms on which it may be used, subject to public- interest limitations

on the scope of that ability. For example, patents provide exclusive use of a technology,

but are granted only for a fixed period of time and in return for disclosing sufficient

technical information to allow competitors to understand it and try to improve on it.

Public intervention is needed because the outcome of some intellectual effort may

be potentially valuable but also easily copied and used by others, leaving little incentive

to incur the original investment costs or to improve it. Without public support for

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innovation the economy suffers from insufficient incentives to develop new products,

technologies, and cultural works, making citizens worse off in the long run. An

additional problem is that the social value of information is often greater than its private

value because there are external benefits from new inventions. Examples include

spillover cost reductions from new technologies to input users and network efficiencies

from software systems.

At the same time, IPRs generate costs. Legal excludability imposes a static cost

on users, reflected by the excess of price over marginal production cost. In the case of

intellectual creations, this distortion can be significant because the marginal cost of

supplying additional blueprints, DVDs, and computer programs is small. Additional

costs are that IPRs encourage duplication of investment in R&D through patent races and

generate wasteful efforts to assert and defend ownership rights and to extend them

beyond the scope of those granted. Enforcement costs may be substantial.

Thus, there are complex tradeoffs facing the design of IPRs. China needs to strike

an appropriate balance between the needs of creators, developers, and users, in

accordance with minimum standards required by TRIPS.

One alternative to IPRs is direct government support for invention, including

public monopolies in technology development, research institutes in agriculture and

industry, and government subsidies to university research. Many such programs are

important complements to IPRs in national innovation systems. However, the

performance of China’s public organizations and state-owned enterprises in

commercializing products and services has been poor in the past. This failure arose

largely from inadequate incentives within public research institutions to focus on new and

marketable inventions.

It is useful to provide a brief description of the main forms of IPRs. Rights to

exploit inventions with commercial uses are granted through patents, utility models or

petty patents, and industrial designs. Patents provide the right to prevent for a fixed time

(20 years under TRIPS) the unauthorized making, selling, or using the product or process

described. Utility models provide exclusive rights for a shorter period to inventions that

embody only a small inventive step. The scope of patent coverage is limited to uses of

the novelty claimed by the inventor and recognized by patent examiners. The technology

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must meet technical criteria for novelty (or non-obviousness), inventiveness, and

industrial utility and must also survive procedures challenging validity. Patent

applications are published for inspection by interested persons. The essential tradeoff in

patents is to create a protected market position in return for disclosure of technical

knowledge.

A related form of industrial property is plant breeders’ rights (PBRs), which

permit developers of new plant varieties to control their marketing and use. These rights

operate much like patents, providing for fixed terms, requirements of distinctiveness in

new plant strains, and disclosure rules. They are supposed to encourage development of

new seed strains for agricultural use.

Rights to market goods and services under exclusive names and symbols are

protected by trademarks and service marks. Registration may be renewed indefinitely,

subject to use requirements. An important related device is the geographical indication,

which permits the use of a particular place name where a good was produced to ensure

that the product embodies quality characteristics of that region. Trademarks provide

incentives for firms to invest in brand-name reputation and product quality and for their

licensees to produce and sell high-quality goods. If marks were not protected, rival firms

would ruin their value by selling cheaper items under those marks. Thus, the social

benefits from trademarks include greater product variety and lower consumer search

costs due to the absence of confusion.

Firms develop technological know-how that is important for production but may

not be patentable or may have greater economic value if it remains undisclosed. Such

trade secrets are protected by legal rules against unfair misappropriation. There is no

exclusive right to the process if it is discovered by fair means, such as reverse

engineering. Trade secrets protection is important because it supports the introduction of

sub-patentable technological processes into commerce and also promotes competition

through reverse engineering.

Artistic and literary creations are protected by copyrights, which are exclusive

privileges to copy and distribute particular creative expressions for a fixed term. Related

IPRs include neighboring rights of performers and broadcasters and moral rights of

original creators to prevent future alterations of their works. Copyrights are subject to

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limitations for social purposes, with the most prominent exception being the fair-use

doctrine, under which others may use copies for scientific and educational purposes.

Countries vary widely in the scope of their fair-use exceptions to copyright, particularly

with regard to reverse engineering of computer programs.

Some new technologies do not fit easily within this framework. Computer

software contains elements of both literary expression and industrial utility, raising

questions about whether it should be covered by copyrights or patents. The TRIPS

standard is for copyright protection, but the United States, Japan and other countries also

provide patents. Similar questions arise regarding semiconductor chip designs, which

achieve a special form of protection under TRIPS. Electronic transmissions of internet

materials, databases, and broadcasts also raise concerns about the adequacy of copyright

protection to encourage their development.

IPRs are enforced both to deter and punish infringement and to discipline rights

holders that abuse their market power. Enforcement against basic infringement involves

seizing unauthorized copies, destroying the associated facilities if necessary, and

imposing fines and criminal sanctions. However, as claims about infringement or abuse,

particularly in the patent realm, become more complicated courts must decide on their

legality, which requires considerable legal and scientific expertise.

4. Intellectual Property Rights and Economic Development

Relationships between IPRs and economic development are extremely complex

and available evidence is difficult to interpret.4 However there is a growing consensus

that stronger IPRs can improve development prospects if they are properly structured.

4a. How IPRs Stimulate Economic Development

There are a number of ways in which IPRs protection can spur economic

development and growth. To begin, a weak regime can stifle both invention and

innovation even at low levels of economic development. Most inventions are specific to

local market circumstances and can benefit from patent or utility model protection.

4 For extensive reviews see Evenson and Westphal (1997), Maskus (2000a), and Primo Braga, et al (1998).

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Innovation usually involves minor adaptations of existing technologies, management

systems, and quality control mechanisms, which can stimulate growth. Such investments

tend to have high economic and social returns by raising productivity toward

international levels. Evidence from Brazil and the Philippines suggests that effective

systems of utility models can promote innovation. 5 Another study demonstrated

econometrically that Japan’s system of utility models contributed positively and

significantly to its postwar rise in productivity.6

Trademarks provide incentives for entry of new firms and development of new

products, even in poor nations. Firms find it easier to innovate cumulatively as they grow

larger and their trademarks are better recognized. This process has two positive effects

on industrial development. First, it stimulates entry of small and medium-sized

enterprises into specific markets. Second, it encourages more successful enterprises to

grow and take advantage of scale economies through interregional production and

marketing. Some may even become significant exporters as they improve quality.

Similar comments apply to copyrights. Sectors that are dependent on copyrights,

such as publishing, recorded entertainment, and software, will experience limited entry

by local firms in their absence. Creation of new films, music, and software is expensive

and little worth the investment by local entrepreneurs if their products will be copied.

Accordingly, society’s long-run cultural and economic development is impaired.

Innovation goes beyond developing new products to establishing marketing and

distribution networks. It is difficult to do this in an environment of weak IPRs because

rights holders cannot readily prevent infringement. IPRs improve the certainty of

contracts, permitting better monitoring and enforcement of rights at all levels of the

supply network. In turn, both innovative firms and their distributors are more willing to

invest in marketing and brand-name reputation.

As firms build reputations through trademarks, incentives grow to deter false use

of those marks. Fake products sold under a misappropriated trademark can ruin

reputations, particularly for new firms, and it is costly to overcome such damage. Thus,

effective trademark enforcement should increase the average quality of products over

5 See Evenson and Westphal (1997). 6 See Maskus and McDaniel (1999).

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time and permit consumers to be less wary of counterfeit goods. This is particularly

important in cases of beverages, foodstuffs, and medicines.

Finally, IPRs can help disseminate knowledge. Patent claims are published and

competitors may use the disclosed technical knowledge to develop further inventions.

This cumulative process of invention, which depends on the narrowness of patent claims,

can be an important source of technical change.7 Moreover, patents provide a legal basis

for trading and licensing technologies. Trademarks and trade secrets also facilitate

information exchange through ensuring that licensees do not abandon their contracts.

Considerable evidence suggests that international flows of technology depend on

the strength of IPRs, among many other factors. For example, international trade in

manufactures is positively affected by the strength of patent regimes in large developing

countries.8 This trade often embodies technical knowledge that may be learned in

recipient countries and adapted to local technological capabilities.9

Foreign direct investment, joint ventures, and technology- licensing contracts also

transfer production knowledge. It is clear that the strength of IPRs influences choices by

multinational firms on where to invest and whether to transfer advanced technologies.

Studies of U.S.-sourced FDI find evidence that firms limit their investments in countries

with weak patents.10 Survey evidence indicates that the level of technology transferred

depends on the ability to maintain control over the technology through defense of

intellectual property. 11 Licensing also tends to rise with stronger IPRs because of

reduced contracting costs and greater legal certainty. 12

4b. How IPRs Limit Economic Development

Tightened IPRs also impose economic costs. In poor countries there may be net

losses in the short-run because the dynamic gains tend to take a long time to emerge.

7 See Scotchmer (1991). 8 See Maskus and Penubarti (1995) and Smith (1999). 9 See Coe, Helpman, and Hoffmaister (1997). 10 See Maskus (1998a) and Lee and Mansfield (1996). 11 See Mansfield (1995) and Contractor (1980). 12 See Yang and Maskus (2001).

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The costs of administering and enforcing a modern IPRs system are high. For

China they easily will amount to annual sums in excess of $10 million. 13 These costs

include training of examiners, judges, lawyers, and enforcement officers, along with the

costs of running various offices. Many of these costs may be covered by administrative

fees charged to apply for and register patents and trademarks, while others may be

reduced by using international registration agencies such as the Patent Cooperation

Treaty (PCT), as does China.

The most visible aspect of IPRs infringement in China is unauthorized copying of

recorded entertainment and software and selling products bearing counterfeit trademarks.

Undoubtedly there are significant amounts of labor employed in copying and retailing

illegitimate products in China. Thus, an important short-run cost of stronger IPRs will be

labor displacement. The adjustment costs tend to be smaller in economies with flexible

labor markets and rapid growth, making it easier to shift workers into legitimate

activities. China has mixed prospects on this score and it is conceivable that copyright

and trademark enforcement will contribute significantly to looming unemployment

problems associated with economic reform.

Because IPRs raise the costs of copying and imitating products and technologies,

learning technological knowledge through simple imitation could become more

expensive in China. There is considerable anecdotal evidence that firms operating in

China lose technologies to potential rivals through defection of technical personnel,

misappropriation by input suppliers, copying of blueprints, and so on. Without effective

trade secret protection, these activities are common and help establish competition.

However, some important practical effects are that foreign firms tend to transfer older

technologies, engage in less technical training, hide key aspects of know-how from sub-

contractors and suppliers, and tend not to establish first-rate R&D facilities.

Thus, there is a balancing act to resolve. Stronger IPRs make uncompensated

imitation more difficult but improve the quality of technology flows. Countries wishing

to become significant technology developers should favor IPRs for that reason.

13 UNCTAD (1996) presents estimates of such costs in several developing countries.

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Stronger IPRs create market power, from which firms may be able raise prices to

monopolistic levels. This concern is particularly relevant in developing countries for two

reasons. First, applications for protection come overwhelmingly from foreign firms,

meaning that the associated profits are transferred abroad. Second, market competition

may be weak, supporting monopolization. As will be discussed in the next section, China

is in an intermediate position in this regard. Patent applications by domestic firms are

rising rapidly but lag behind foreign applications. Broader economic reforms have

improved competitive processes but the economy remains far from a situation of free

entry and vibrant competition in technology and product markets.

Chinese authorities may be especially concerned about the implications of patent

rights for prices of medicines. There is evidence that patents can support markedly

higher prices for protected drugs than for copied and generic drugs.14 However, the

extent of these price increases depends on the competitive aspects of markets. The more

competitive the local drugs market is before patents are awarded, the larger is the share of

drug production that consists of copies of patentable drugs, and the more inelastic is

demand for medicines, the higher will be the price increases caused by patents. These

conditions suggest that countries with extensive drug imitation and high demand could

experience substantial price increases for protected drugs. In this regard, China’s policy

of public procurement at negotiated prices is appropriate for providing public health

services.

Another area of concern is computer software. It is often claimed that software

would be much more expensive with enforced copyrights because the current prices of

legitimate copies in developing nations are very high compared to prices of unauthorized

copies. However, in countries with high piracy rates software producers (or their

distributors) tend to sell at low volumes and high markups, reflecting small markets with

inelastic demand. In China such markets are largely limited to foreign-owned enterprises

and government agencies. As markets broaden under copyright enforcement, foreign and

domestic firms should supply more legitimate copies at lower prices, suggesting that

ultimate price increases could be modest.15

14 See Watal (1999) and Lanjouw (1998). 15Prices of copyrighted goods have fallen sharply in Taiwan since the aggressive crackdown on counterfeiting in the mid-1990s, in part because of additional competition from legitimate local developers.

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Thus, there are legitimate concerns about market power supported by IPRs.

However, competitive markets and appropriate regulation can mitigate these impacts

without unduly reducing innovative incentives. IPRs need to be introduced into markets

in which other competitive processes, such as firm entry, labor flexibility, distribution

systems, and international trade, are operating effectively.

Competition is important because IPRs may be abused, as shown by litigation

problems in the United States, the European Union, and elsewhere. Such abuses include

bad-faith lawsuits, hidden ownership of intellectual property, restrictive patent pooling

agreements, refusals to license technologies, tie- in sales in related markets, and insistence

on exclusive rights to competing technologies. Thus, China must develop mechanism for

ensuring competition maintenance in markets affected by IPRs.

4c. A Scorecard for China’s IPRs Regime

With this background it is useful to assess informally the legal standards China

has adopted in terms of how they may affect prospects for technical change and the

provision of certain public goods.16 For this purpose, I compare China’s regulations in

several critical areas against benchmark standards, which are consistent with TRIPS

requirements, for middle-income countries as set out by the World Bank (2001). China

has characteristics of the dynamic middle- income countries, including a growing base of

human capital and sophisticated capabilities in science and technology, suggesting that

this comparison may be appropriate. However, it also suffers from substantial rural and

urban poverty and many of its enterprises use technologies that lag significantly behind

those in the modern sectors. Thus, it is difficult to provide definitive analysis of the

nation’s laws in this context and the following analysis is offered largely for purposes of

illustration and discussion.

An overview is provided in Table 2. Thus, in the copyrights area, China provides

TRIPS-standard terms of protection for creative goods, such as a once-renewable 25-year

term for software copyrights (50-year maximum period). The essential question is

whether the particular conditions of legal protection are sensible for China. For example,

16 See also Potter (2001).

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it is recommended that middle- income countries provide fairly wide exceptions for fair

use of copyrighted materials in education and scientific research. China’s Copyright Law

embraces this concept, permitting free use of copyrighted material in journals,

periodicals, and broadcast media for purposes of disseminating news. It also allows the

uncompensated making of copies for classroom use and scientific research and allows a

free right to translate works from Han into minority languages. In software, users are

permitted a limited right of decompilation for purposes of developing new programs,

which should help the industry remain fairly open to incremental innovation and

competition. However, the government is considering extending patents to computer

programs, a standard that would exceed TRIPS requirements and is found only in the

United States, Japan, and Australia.17 For a software sector that remains young and

subject to considerable cross-fertilization of software through learning and reverse

engineering, such a choice seems questionable for the medium term. Neither should

China extend patents to methods of instruction or of doing business.

Other important issues exist in the copyright area. China has relatively weak

complementary institutions for realizing economic returns to creative activity, including

collection societies for licensing recorded music and gathering royalties. Indeed, only

under the Amended Copyright Law of 2001 were copyright owners given the right to

authorize collection associations to administer their rights. Further, because contract

enforcement can be weak and uncertain, the ability of enterprises to allocate rights in

creative works is limited. Such institutions are important for providing a full framework

within which the development of artistic and literary work can grow beyond intermediate

stages.18 To date China protects databases solely with copyright protection, as mandated

by TRIPS, and clarifies that such protection cannot interfere with the independent rights

of those who develop components of compilations. This minimum standard is

appropriate for a country with a strong interest in access to information databases, and

China should be wary of moving toward the much stronger standards in the European

Union. Finally, ratification of the WIPO Copyright Treaty and the Treaty on

17 The European Union has moved recently toward the provision of patent protection. 18 See Caves (2000).

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Performances and Phonograms could be beneficial in sorting out copyright protection for

internet transmissions, so long as appropriate fair-use limitations are provided.

The Amended Trademark Law of 2001 clarifies the definition of well-known

trademarks by setting out five criteria that must be met for achieving protection without

registration. It remains to be seen whether these criteria will limit the unauthorized use of

such marks by others and the regulation is unclear about how widely the restrictions on

use will apply across sectors of business. That law also recognizes that well-known

marks should be applicable to domain names on the internet, a provision that should

promote wider content available to Chinese internet users.

Protection of confidential test data from disclosure provides applicants for patents

in pharmaceutical and chemical products a period of exclusivity in the use of results from

clinical trials. It seems advisable for middle- income economies with domestic research

capabilities in medicines and biotechnology to provide such exclusivity for some period,

but TRIPS is silent on the length of any such requirement. Surprisingly, China has opted

to protect it for six years from application date, in comparison to the U.S. standard of five

years. China’s law may thus be overly protective from the standpoint of the

encouragement of domestic competition. Next, China’s law on unfair competition has no

explicit language on the legality of restraints on the ability of employees to reveal

technical secrets to rivals that may hire them, other than to declare void unfair “promises

of gain”. It is unclear what this statute covers and the ambiguity may be costly in terms

of sorting out the scope of unfair competition in this area.

In its 2001 patent law, China retains appropriate exemptions from coverage for

discoveries of nature, mental methods of arriving at results (such as computer algorithms

and mathematical formulas), diagnostic and surgical treatments, and plant and animal

varieties. Thus, China does not patent higher-order life forms or biological research

tools. These limitations are widely advocated for developing countries with emerging

biotechnology sectors in order to avoid locking up critical technologies that support

additional research and learning. China’s patent law does not permit experimental use of

patented materials, however, which may be overly strong in the context of its

development strategies. The country’s standards covering government use, compulsory

licenses, and utility models and designs are typical of middle- income economies.

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Finally, China’s plant variety law also seems appropriate for its needs. The patent

law excludes such inventions from coverage, leaving them to variety protection. China’s

regulation permits the farmers’ privilege to use propagating materials for re-planting and

also permits experimental use for science and for rival breeders to develop new varieties.

4d. The Issue of Enforcement

As amplified in the next section, the largest remaining obstacle to effective use of

IPRs in China is weakness in enforcement procedures. Recent legal changes increased

the scope of enforcement considerably. As noted in Table 1, criminal sanctions are now

available for cases of willful infringement, while the maximum permissible monetary

sanctions were increased. Preliminary injunctions and orders for seizure of suspected

infringing goods now may be issued, which are important components of timely relief for

IPRs owners. Courts may also order compensatory damages, though this standard is

weaker than what might be required to deter infringement a priori. Finally, enhanced

access to judicial review is provided, which is consistent with prior efforts by the Chinese

government to strengthen its enforcement mechanisms.

Whether improvements in enforcement are liable to be in China’s favor as a

development issue depends on how economic agents respond to the changed incentives.

As noted above, it is likely that this factor will generate higher equilibrium inflows of

technology transfer. However, the essential question is whether it will expand incentives

for local business development. The following section provides evidence that this

expansion should occur.

5. The IPRs Situation in China

To provide more concrete perspective on the potential impacts of IPRs reform,

consider the current situation regarding the use and adequacy of such rights. First, I

discuss results of interviews conducted in 1998 and 2001 of public officials, university

scholars, and enterprise managers. The evidence paints a consistent picture and is not

much changed in 2001 from three years earlier. In fact, a number of interviewees

described the situation with respect to enforcement of IPRs to have deteriorated in that

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period. Second, I consider recent patent and trademark statistics in China. These figures

suggest that the use of formal IPRs is growing rapidly but there are significant regional

disparities. Overall the analysis suggests that the IPRs regime for invention and

innovation is improving in China but there remain significant problems.19

4.1 Discussion of Interview Findings

Management officials and intellectual property managers of enterprises from

several IPR-sensitive industries were interviewed. The enterprises represented a mix of

state-owned enterprises (SOEs), private Chinese enterprises, joint ventures with

international firms, and majority-owned subsidiaries of multinational enterprises. Most

firms in the last category are in high-technology sectors and have significant R&D

programs in their home countries, though some do in China as well. Thus, the sample is

not representative of the bulk of Chinese industry at this time but is more focused on

product and technology development.

Overwhelmingly, enterprise managers believe that the legal structure for IPRs in

China has improved markedly and is now adequate. However, the majority think the

enforcement environment remains quite weak, while the rest find it to be weak but

improving. Interestingly, Chinese enterprises tend to view the system as improving more

rapidly than do foreign-owned enterprises and joint ventures. Many high- technology

Chinese enterprises applaud the new legal climate, which allows them scope for

defending their intellectual property.

Unquestionably the main problem facing firms wishing to exploit intellectual

property in China is inadequate enforcement. There can be long delays in enforcement

actions and court rulings. Prior to the legislative changes in 2001, monetary penalties

were small even in cases of significant infringement and there was little scope for

criminal prosecution of willful and ongoing violations. The new laws increase maximum

fines and clarify the nature of criminal activity, but some interviewees thought these

changes would be insufficient to deter infringement. Enforcement actions can be

arbitrarily taken and non-transparent. The central government and certain regional and

19 See also Dahlman and Aubert (2001).

17

municipal governments are taking steps to reduce these problems. Several enterprise

managers in 2001 positively commented on this change.

There are several structural sources of weak enforcement. First, trademark

infringement and illegal copying remain profitable and face little opposition, especially in

rural and inland regions. Second, enterprises engaged in infringement often are important

employers and sources of revenue for local governments. Third, low salaries for public

officials may reduce their effectiveness as enforcement agents, while administrative

programs may be underfunded. Fourth, legal and technical expertise for administrative

and judicial operations is limited despite the existence of special training programs in

IPRs.

Among these problems, “regional protectionism” in IPRs is regarded as the most

difficult to confront by enterprises suffering infringement. There is little coordination

among regional bureaus of the Administration for Industry and Commerce (AIC).

Moreover, the regional AICs have weak administrative powers and actions of municipal

governments may supercede them. Municipal government officials may well have

priorities that take precedence over IPRs enforcement.

Managers of both Chinese and foreign-affiliated enterprises expressed the view

that weak enforcement of IPRs results in widespread copyright and trademark

infringement. A major problem is that trademark violations often target innovative

Chinese enterprises and thereby deter local business development. Examples were given

of problems facing Chinese-brand producers of such consumer goods as medicines, soft

drinks, processed foods, tobacco products, and clothing. Enterprises selling electronics

products seemed particularly vulnerable. Once brand recognition is achieved, domestic

enterprises find their trademarks applied to unauthorized products of lower quality,

damaging the original enterprise’s reputation. In some cases, Chinese enterprises either

had to give up on their trademarks and become licensees of better-known enterprises, or

undertake extensive private and public enforcement actions. It is impossible to know

how much this problem hampers industrial development but the impact could be

significant.

Weak enforcement also impedes efficient use of patents and trade secrets. Patent

infringement seems to be most common in utility models, which are easy to copy but are

18

overwhelmingly owned by Chinese enterprises. Several foreign enterprises also claimed

to have lost patented technologies through unfair means, such as former employees

selling design specifications and technical manuals. According to one industry

association, such cases are becoming more common and increasingly targeted on

sophisticated technologies. Interviewers claimed that many foreign companies are

considering more carefully whether they wish to transfer advanced technologies into the

Chinese economy.

Defection of technical and managerial employees remains a basic problem for

both foreign-owned and Chinese enterprises. In economic terms a balance is needed

between promoting mobility of skilled labor, which raises diffusion and competition, and

discouraging uncompensated losses of technical knowledge, which can reduce

competition over time. Both foreign and domestic enterprises attempt to manage the

problem with temporary anti-disclosure clauses, but such contracts have been difficult to

enforce in China. As noted earlier, recent changes in the law have not clarified this issue.

Most respondents agreed that the environment for selling copyrighted materials is

improving in China, though pirating of software, games, DVDs, and music remains

common. While large foreign firms claim significant harm from such copying, it is likely

that relatively larger losses are suffered by Chinese entertainment and publishing

interests. For its part, the Chinese software industry is growing rapidly, largely because

of a substantial base of skilled software engineers and managers. However, according to

many interviewees, such firms concentrate on developing small-scale programs that

attract less copying, such as business applications or limited-run games. This problem

could delay the establishment of Chinese-developed software standards and networking

software.

There are significant differences between Chinese and foreign-owned businesses

in their ability to deal with trademark and other IPRs-related violations. Foreign

companies have more resources to combat infringement than domestic enterprises. An

enforcement action is a significant expense for a small or medium-sized Chinese

operation. In that sense, enforcement difficulties are biased against Chinese business

development. Furthermore, foreign companies, particularly Western ones, are more

inclined to seek legal solutions to IPRs problems.

19

Foreign companies may undertake more defensive actions in the presence of weak

IPRs. Managers of most foreign enterprises indicated a reluctance to locate R&D

facilities in China, though this is changing rapidly as the legal environment improves.

Nearly all indicated that in the past they transferred technologies that are at least five

years behind global standards in the expectation that those technologies would be lost to

local competition, or brought in technologies that would be obsolete quickly. Foreign

enterprise managers are often reluctant to license technologies, preferring joint ventures

and majority-owned subsidiaries in which they can exercise greater control of proprietary

secrets. Enterprises are unlikely to integrate fully their Chinese operations, splitting

various production processes among facilities in order not to reveal fully the underlying

know-how.

Other defensive measures are used by both Chinese and foreign companies. One

is to sell only to established customers that need assured quality, such as hospitals, large

enterprises, and public agencies. This acts as a barrier to entry of small firms needing the

associated products or inputs. A second is to establish strict vertical supply and

distribution chains to permit monitoring of quality. A third is to employ technical

safeguards, such as software locks and encrypted source code that must be decoded to

operate software upgrades.

It is impossible to know how these distortions associated with weak IPRs

contribute to economic inefficiency in China, though the effects presumably are

significant. If so, stronger IPRs over time will generate important static and dynamic

efficiencies.

For their part, public officials often raise concerns about the potential impacts of

stronger IPRs on prices and competition. Some officials also recognize that stronger

IPRs need to be accompanied by other policy measures to build technological capacities

and maintain competition. However, this recognition only recently has been translated

into such policy initiatives as the Standards Office within the State Industry Commission,

which will establish uniform national standards for information networks, including

copyright provisions.

4.2 Patent and Trademark Activity in China

20

Despite these problems, data on patent and trademark use indicate that both

foreign and domestic enterprises are applying for more protection. Table 3a presents

figures on applications to the State Intellectual Property Organization for all three types

of patents from 1994-2000. Domestic enterprises more than doubled their applications

for invention patents, while foreign applications rose by 235 percent. From 1996 through

1999 foreign applications considerably exceeded domestic applications. A significant

rise in Chinese domestic applications in 2000 virtually equalized the number for that

year, however. On this measure, Chinese enterprises are now applying for nearly as

many invention patents, with their higher inventive content, as are foreign enterprises.20

In contrast, applications for utility models and design patents overwhelmingly are

filed by Chinese organizations. In both categories domestic applications rose far faster

than foreign applications. Thus, these rewards aimed at encouraging small-scale

invention seem to be having their desired effect on domestic innovation.

Table 3b shows data for patent grants and the ratio of cumulative grants to

cumulative applications over the same period. There was a rapid increase in grants of

invention patents to both domestic and foreign applicants, with the former nearly

catching up to the latter by 2000. The aggregate grants ratios for invention patents are

surprisingly low, perhaps reflecting long examination delays. Grant rates are much

higher in utility models and design patents, which are easier to examine and carry shorter

protection periods.

Tables 4a and 4b indicate trends in bilateral invention patenting activity between

China and key trading partners.21 Chinese patent applications abroad rose sharply

between 1996 and 1998 in all countries listed save India, suggesting an increasing

international orientation of Chinese innovation. However, China remains well behind

most developed countries in terms of bilateral applications flows, with the United States

and Japan together applying for some 37,000 patents in 1998 in that country. Despite the

increase in Chinese applications abroad, only Japan actually granted rising numbers of

invention patents to Chinese inventors.

20 It is conceivable that the increase in Chinese applications come primarily from joint venture partners of foreign enterprises but unfortunately the available data do not make this distinction. 21 Because these data were taken from WIPO they include applications made under the Patent Cooperation Treaty.

21

Table 5 provides a breakdown of total domestic patent applications for the top

eleven patenting regions in China over 1985-96 and 2000. Residents of Guangdong

applied for over 21,000 patents in 2000, while people in Hebei applied for less than

4,000. Better measures of inventive capacity are given in the final two columns as

applications per million people and applications per million yuan of regional GDP. In

these rankings Beijing is at the top of the list, with far more applications per capita and

per unit of output than any other province. This reflects both Beijing’s status as a

technology developer and the fact that many patent registrations come through legal

offices in the capital. Shanghai has the second highest applications per person, but ranks

sixth in applications per yuan of GDP. Fujian and Hebei rank low in both categories.

The middle column ranks these regions in terms of average income per capita.

There are large regional disparities in income levels, ranging from Sichuan at the bottom

to Shanghai at the top. The difference between them is a factor of 5.6, which is

extraordinarily high for regions within a country. It is interesting to correlate per-capita

GDP with the relative patent application figures. There is a strong positive correlation

(0.54) between GDP per capita and patent applications per million people. Thus, richer

provinces apply for more patents (develop more products) per person than poor

provinces. The correlation between GDP per capita and applications per million yuan of

GDP is higher (0.78). Accordingly, higher incomes are associated with greater

innovation propensities, which in turn raise regional economic growth.

We do not show data for trademark registrations but they tell a similar story. In

particular, trademark applications have risen rapidly since 1994, especially those through

the Madrid Protocol. Far more domestic marks are registered than foreign ones but

foreign applications have increased at a faster pace. In terms of regional performance,

Guangdong had the largest absolute number of applications in 2000, followed by

Zhejiang and Jiangsu. Scaled by population, however, Shanghai ranked first by a large

margin, followed by Beijing, Zhejiang, and Guangdong. There is a very high correlation

(0.81) between per-capita GDP and per-capita applications, reflecting again that

trademark applications rise with income levels.

Thus, the use of patents and trademarks is rising rapidly in China. One reason is

that laws have been strengthened and fees reduced, encouraging more applications. A

22

second is that as trademark and patent infringement have increased, both domestic and

foreign enterprises recognized the importance of establishing intellectual property

protection, even in an environment of weak but improving IPRs. A third is that Chinese

markets are getting deeper as income grows, despite the substantial barriers to

interregional integration. Registration of IPRs is important for exploiting deeper markets.

The final reason is that Chinese research organizations and enterprises are engaged in

more invention and Chinese firms are undertaking more innovative activity.

5. Conclusions and Recommendations

In recent years China has made significant progress on the legislative end of

intellectual property rights, especially in preparation for its entry into the WTO. The

specific standards it has adopted across the range of intellectual property regimes are

largely consistent with what might be recommended for middle- income developing

countries with strong innovation potential. However, in some dimensions the new

Chinese standards may be overly protective for an economy that remains largely a net

importer of new technology and information. At the same time, China continues to

experience severe enforcement problems. Enforcement is likely to be problematic for the

intermediate term because of structural difficulties with the system and because costs of

copying and counterfeiting remain small relative to prices of legitimate products.

China is undergoing a long process of increasing sophistication in technology use

and development. Three important problems arise with IPRs as concerns this transition.

First, inadequate enforcement of IPRs limits incentives to develop products and brand

names, especially on the part of small and medium-sized domestic enterprises. This

structural difficulty likely limits entry of new firms and the development of

entrepreneurial skills. It also restricts the ability of enterprises to market nationally and

to take advantage of economies of scale, and tends to reduce investment in quality

improvements. Over time, this situation could make it increasingly difficult to break into

export markets for high-quality and high-technology goods.

Second, Chinese enterprises and research organizations are engaging in more

innovation, as suggested by the patent and trademark statistics. However, as shown

elsewhere the country remains behind global standards in allocating resources to R&D

and science (Maskus, et al, 1998). Moreover, interviewees noted that SOEs and state

23

research institutions face structural difficulties in commercializing the results of

invention. This points out the importance of continuing to develop a technology

innovation system that encourages innovative activity.22 The state has important roles to

play in promoting pre-competitive research and removing disincentives to

commercialization. China has made progress toward these goals, with support programs

in information technology, biotechnology, and other important areas, along with efforts to

raise the flow of knowledge from institutes and universities to producing enterprises.

Nonetheless, ambiguities remain about effective ownership of intellectual property rights.

This is another reason that the new system of IPRs should be an important component of

the evolving innovation system.

Third, stronger IPRs alone are not sufficient to establish effective conditions for

further technology development and growth. Rather, they must be embedded in a

broader set of complementary initiatives that maximize the potential for IPRs to be pro-

competitive over the long term. 23 An important complement is development of human

capital through education in science, technology, and law and acquisition of skills

through training in enterprises. Enterprises should be more willing to undertake such

training under an improved IPRs regime. Both directly and indirectly, then, effective

IPRs can help Chinese enterprises raise their technological capabilities, which is critical

for adaptation of foreign technologies and innovation of new products.

Another supporting factor is to ensure that competition on domestic markets is

sufficient to prevent stronger IPRs from becoming a damaging source of market power.

Further enterprise reform and deregulation, are important in this context. Over time the

liberalization commitments made in the WTO will provide important competition as well.

Finally, like other countries China has the right to safeguard its interests in

competition and social objectives through effective regulation of IPRs as those rights

become stronger. Thus, the government should think through the appropriate form of

pricing regulations and compulsory licensing in its drug procurement programs as

medicines receive stronger protection.

22 Dahlman and Aubert (2001) discuss this in detail. 23 See Maskus (2000a) for more detailed discussion.

24

Moreover, an opportunity arises for China to consider what form of competition

regime it will implement as it shifts further toward the market. Currently China tries to

maintain competition through centralized regulation of market structure, ownership, and

innovation, a system that will become increasingly incompatible with needs for

technological change. Thus, a shift toward anti-monopoly regulation of such IPRs abuses

as monopoly pricing, restrictive licensing arrangements, and refusals to deal is important.

China may also need to employ compulsory licenses for this purpose. Such regulation

needs to be well defined, non-discriminatory, and professionally applied by the

competition authorities and courts in order to be effective. This points again to the need

for building legal expertise in IPRs over the long term.

The authorities in China expect that the stronger IPRs regime set in place by new

legislation and increased efforts at enforcement will support dynamic gains in technology

acquisition and innovation. This outcome seems achievable in those regions and sectors

that are technologically dynamic. At the same time, however, substantial differences in

incomes, education, and entrepreneurship persist among regions, while much of the

country remains poor. It will be a significant challenge for China to develop a

comprehensive approach to regulating the use of IPRs that helps bring these poorer

regions and groups more fully into the modern commercial system.

25

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Table 1. Substantive Requirements of the TRIPS Agreement in the WTO

General Obligations TRIPS Norm Pre-WTO Status of Chinese Law

Actions

National Treatment Applied for persons Discrimination in copyright enforcement, trademark agents, and trade secrets protection

Remove discrimination

Most Favored Nation MFN with reciprocity exemptions for copyright

Member of Berne Convention; TRIPS-compliant

Copyrights and Neighboring Rights TRIPS Norm Pre-WTO Status of Chinese Law

Actions

Term of protection Life + 50 years; 50 years corporate

TRIPS-compliant

Computer software CR Copyright TRIPS-compliant Discussing patents Data compilations Copyright Not protected Protect with copyright Phonogram producer and performer rights

Right to prevent fixation, reproduction, or broadcasting for 50 years

Inconsistent with TRIPS Clarify compensation system; strengthen rights

Broadcast rights Right to prevent fixation, reproduction, or broadcasting for 20 years, or copyright

Inconsistent with TRIPS Provide right of communication to public

Rental rights Right to prohibit rental of computer programs and movies

Not protected Provide rental rights

Discrimination in enforcement procedures

National Treatment Foreigners could not use local copyright bureaus

Remove discrimination

1

Table 1. Substantive Requirements of the TRIPS Agreement in the WTO, continued

Trademarks TRIPS Norm Pre-WTO Status of Chinese Law

Actions

Well-known marks Protected without requiring registration

No criteria for defining “well-known”; none granted to foreigners

Protect well-known marks; establish criteria

Use restrictions Use not required for registration; import restraints cannot be used to invalidate use

Law is unclear on prior use Comply with TRIPS

Symbols protected Rights extend to distinguishing names, letters, numerals, colors

Certain signs are ineligible Comply with TRIPS

Geographical Indications TRIPS Norm Pre-WTO Status of Chinese Law

Actions

Basic protection Prevent misleading claims of origin

Not protected Comply with TRIPS

Wines and spirits Prevent use of such words as “style” or “like”

Not protected Comply with TRIPS

2

Table 1. Substantive Requirements of the TRIPS Agreement in the WTO, continued

Patents TRIPS Norm Pre-WTO Status of Chinese Law

Actions

Eligibility Basic exemptions Probably TRIPS-compliant Clarify compatibility with TRIPS Pharmaceutical products Covered; interim marketing

rights TRIPS-compliant

Living organisms Micro-organisms and biological production processes covered; “higher-order” life optional

TRIPS-compliant; plant and animal varieties excluded

Considering patents

Term of protection 20 years from filing TRIPS-compliant Rights Exclude others from

production, use, or distribution

TRIPS-compliant

Compulsory licenses Wide scope for use with compensation and limiting conditions

TRIPS-compliant

Burden of proof in process patent infringement

Falls on defendant TRIPS-compliant

3

Industrial Designs TRIPS Norm Pre-WTO Status of Chinese Law

Actions

Term of protection 10 years from filing TRIPS-compliant Textile designs Covered Protected by copyright Considering design patents Plant Varieties TRIPS Norm Pre-WTO Status of Chinese

Law Actions

Basic protection Plant breeders’ rights to prevent commercial production or marketing of propagating material

Plant breeders’ rights with farmer’s privilege and research exemption (UPOV 1978)

Stronger protection Patents optional No patents Integrated Circuits TRIPS Norm Pre-WTO Status of Chinese

Law Actions

Term of protection 10 years from filing TRIPS-compliant Rights Prevent distribution of IC’s

or IC-using products TRIPS-compliant

Exceptions Non-voluntary license TRIPS-compliant Trade Secrets TRIPS Norm Pre-WTO Status of Chinese

Law Actions

Protection from unfair disclosure Defines boundaries of unfair practices

TRIPS-compliant

Test data for pharmaceuticals and agricultural chemicals

Protection from disclosure for unspecified period and unfair use of undisclosed data

Unfair use not prohibited Protection for six years from date of marketing approval

4

Table 1. Substantive Requirements of the TRIPS Agreement in the WTO (continued)

Control of anti-competitive practices

TRIPS Norm Pre-WTO Status of Chinese Law Actions

Compulsory licenses Wide latitude for use subject to conditions and consultations

Weak consultation provisions Comply with TRIPS

Exhaustion No standard Depends on form of IPR Enforcement TRIPS Norm Pre-WTO Status of Chinese Law Actions Sanctions Civil and criminal sanctions and

border measures In existence but weak enforcement action

Enhance enforcement

Provisional measures Preliminary injunctions and seizures

Not fully available Comply with TRIPS

Damages Adequate to compensate victim of infringement

Generally low or no compensation

Comply with TRIPS

Administrative actions Enforcement may be through administrative actions

Available but costly and tends to result in small fines

Enhance enforcement

Judicial review Must be available Not widely available Enhance review procedures

Table 2. An Assessment of China’s IPRs System for Development Purposes Area of IPRs Middle-Income Standards China’s post-WTO

Standards Commentary

Copyrights Fair use exceptions

Liberal exceptions for education and research

Same Important for research and technology access

Computer software

Copyrights with decompilation and fair use

Permit limited decompilation and fair use; considering patents

Patents may be overly protective

Market institutions

Improve collection societies and rights contracts

Weak institutions Improvement would be beneficial

WIPO Treaties Adopt minimum standards Considering ratification Could improve internet content and access

Data compilations

Copyrights with creativity requirement

Same Avoid EU-type protection

Trademarks Well-known marks

Narrow definition of sectoral coverage

Unclear Clarify scope and recognize well-known marks

Domain names Protect against fraudulent registration Same Important for promoting internet use Confidential Information

Test data Short period of protection from disclosure

Six years of protection Stronger than U.S. standard

Disclosure Restraints

Limited restraints on what employees may reveal to new employers

Unclear limitation on “promise of gain”

Ambiguity may be detrimental

1

Table 2. An Assessment of China’s IPRs System for Development Purposes, continued

Area of IPRs Middle-Income Standards China’s Post-WTO Standards

Commentary

Patents Exemptions from eligibility

Exemptions for discoveries, algorithms, medical treatment methods, plants and animals

Same Appropriate to retain exemptions

Novelty Consider oral prior art Oral prior art in China Scope could be widened Inventiveness High step Notable progress Unclear Scope of claims Narrow claims and narrow doctrine

of equivalents Single claim; scope unspecified

Depends on examiners

Experimental use Permit experimental use Not permitted May be overly strong Exhaustion International exhaustion National exhaustion Strong protection Government use For clear public interest Same Appropriate Compulsory licenses

Permitted under TRIPS conditions Same Appropriate

Utility models and designs

Short duration, low inventiveness Ten-year duration, same

Appropriate

Plant Varieties Farmers’ privilege Recognize farmers’ privilege Recognized Appropriate Breeders’ Exemption

Use for breeding and scientific research permitted

Permitted Appropriate

2

Table 3a. Patent Applications by Type and Nationality, 1994-2000 Invention Patents Utility Models Design Patents Total Patents Domestic Foreign Domestic Foreign Domestic Foreign Domestic Foreign 1994 11191 7876 45188 323 11428 1729 67807 99281995 10018 11618 43429 312 15433 2235 68880 141651996 11471 17046 49341 263 21395 3219 82207 205281997 12713 20953 49902 227 27456 2957 90071 241371998 13726 22234 51220 177 31287 3345 96233 257561999 15596 21098 57214 278 37148 2905 109958 242812000 25346 26401 68461 354 46532 3588 140339 30343 Growth 126.50% 235.20% 51.50% 9.60% 307.20% 107.50% 107.00% 205.60%Total 100061 127226 364755 1934 190679 19978 655495 149138 Table 3b. Patent Grants by Type and Nationality, 1994-2000 Invention Patents Utility Models Design Patents Total Patents Domestic Foreign Domestic Foreign Domestic Foreign Domestic Foreign 1994 1659 2224 32611 208 5507 1088 39877 35201995 1530 1863 30195 276 9523 1677 41248 38161996 1383 1593 26961 210 11381 2252 39725 40551997 1532 1962 27185 153 17672 2488 46389 46031998 1655 3078 33717 185 26006 3248 61378 65111999 3097 4540 56094 274 32910 3241 92101 80552000 6177 6506 54407 336 34652 3267 95236 10109 Growth 272.30% 192.50% 66.80% 61.50% 529.20% 200.20% 138.80% 187.20%Total 17033 21766 261170 1642 137651 17261 415954 40669

3

Grants Ratio 17.00% 17.10% 71.60% 84.90% 72.20% 86.40% 63.50% 27.30% Source: State Intellectual Property Office of The People's Republic of China, 2000 Annual Report

4

Table 4a. Bilateral Invention Patent Applications, 1994-98 1994 1996 1998 by China in China by China in China by China in China Country in foreign by foreign in foreign by foreign in foreign by foreign USA 190 8105 246 14892 436 25634 Japan 137 3742 145 7212 373 11301 Germany 172 2094 210 3631 624 6599 UK 188 2028 224 2656 627 4216 Australia 87 692 101 746 295 1067 R. of Korea 84 569 97 1645 309 2076 Brazil 85 20 100 39 290 104 India 21 8 54 6 15 21 Table 4b. Bilateral Invention Patent Grants, 1994-98 1994 1996 1998 to China by China to China by China to China by China Country by foreign to foreign by foreign to foreign by foreign to foreign USA 48 701 46 449 72 785 Japan 5 579 29 445 7 927 Germany 16 213 15 148 7 318 UK 21 94 29 66 12 133 Australia 4 24 5 20 14 36 R. of Korea 0 48 0 49 2 149 Brazil 2 4 0 1 5 2 India 5 2 1 0 0 3 Note: data include applications under Patent Cooperation Treaty. Source: World Intellectual Property Organization, Industrial Property Statistics, various years

5

Table 5. Patenting Indicators for Top Patenting Regions, 1985-96 and 2000 Applications 2000 GDP per 2000 Applications per 2000 Applications per Region 1985-96 2000 capita, yuan million of population million yuan of GDP Guangdong 42159 21123 11180.55 487.84 436.33 Shanghai 21758 11337 27187.57 1299.76 478.07 Beijing 54348 10344 17936.32 3932.56 2192.51 Zhejiang 29197 10316 12906.56 624.27 483.68 Shandong 37082 10019 9408.97 408.44 434.09 Jiangsu 34983 8211 11538.99 470.33 407.60 Liaoning 38768 7151 11017.23 914.77 830.31 Sichuan 27046 4496 4814.86 324.72 674.41 Fujian 11027 4211 11293.86 317.69 281.29 Hunan 26400 4117 5732.76 409.94 715.08 Hebei 20584 3848 7545.91 305.22 404.48 Correlation with 0.54 0.78 GDP per capita Sources: The Patent Office of the Peope's Republic of China, Annual Report, 2000 and State Statistical Bureau, China Statistical Yearbook 2000, Author's Calculations